This blog covers financial, political and other topics the author gets the urge to write about. It does not provide personal financial, legal or other advice. Consider consulting a personal professional adviser before making any decisions. Copyright (c) 2007, 2008, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017 by Leonard W. Wang. All rights reserved.

Monday, March 24, 2014

Russia's seizure of Crimea reminds us that globalization isn't all it's cracked up to be. The fall of the Soviet Union led to self-satisfied proclamations in the West about the triumph of capitalism and history ending in a glowing halo of liberal democracies. Economic globalization would supposedly lead to worldwide reallocation of capital and resources to ever more efficient applications, with the result that economic tides would rise everywhere and prosperity would simmer in every pot. Nations and peoples worldwide would become increasingly interdependent and interlinked, making mutual tolerance in everyone's pecuniary interest. Pots would melt around the world, diversity would be embraced, and preschoolers everywhere would learn the lyrics of Kumbaya.

Russia is interlinked with the rest of the world today: economically in the energy markets and the financial markets, and securitywise with America and Western Europe in terms of dealing with Islamic radicals. But none of that made a difference when Ukraine moved toward closer links with the West. The centuries old Russian imperial imperative--that the Eurasian heartland be controlled from Moscow--howled. Russia endeavored to maintain strategic geographic advantage by snatching control of Crimea's ports and naval bases, securing military and trade access to warm water. Political machinations inside Ukraine have increased, in an effort to impede its Westward shift. Russian troops in large numbers coincidentally gather for exercises within spitting distance of Ukraine's borders. The economic sanctions imposed and threatened by the West have had no discernible impact on Russian policy.

Globalization was an illusion fancied by people who fancied themselves elites. This fancy illusion could be maintained as long as one cultivated ignorance of history. But globalization is nothing new. Europe in 1913 had extensive cross-border economic and financial relationships. The European elites of the day were multilingual, cosmopolitan and cultured. Somehow, none of that prevented the ignition of World War I over . . . well, nothing. The most ridiculous war ever fought, World War I resulted in 20 million dead and peace terms imposed on Germany that were so harsh they practically guaranteed another war. And that war--the Second World War--would require only 21 years before exploding in a frenzy of land grabs disturbing similar to what Vladimir Putin is doing now. Whatever economic, financial, cultural and other ties are fostered by globalization, they don't trump the tribalism that characterizes almost all peoples in Europe, Asia and Africa.

Tribalism is difficult for Americans to grasp. Having built a remarkably successful, diverse nation, Americans struggle with the idea that narrow concepts of group, based on cultural and historical ties, could somehow be so important as to justify conquering and killing. Surrounded by the enormous economic benefits of the Melting Pot, Americans don't understand why other peoples can't embrace tolerance when tolerance will allow them bigger shopping sprees at the mall. But history tells us that you have to understand and deal with other peoples' irrationalities. War, after all, is essentially always irrational. But there are plenty of wars, all the time. A smart foreign policy incorporates the need to consider and address other peoples' motivations, whatever they may be.

Economic sanctions have a role in America's and Europe's response to Russia. But it would be a mistake to think they will be enough. The sheer exertion of power will also have a place. This doesn't mean triggers need to be pulled. Strengthening NATO would get through to Putin, whose attention you get only if you exert power. A pragmatic alliance with China should be sought (recall that Russia and China fought brief shooting wars in 1929, 1934, 1937 and 1969, so the Chinese have no illusions about Russian intentions). The Japanese, who fought two wars with Russia in the 20th Century, should get a fist bump and more. Unavoidably, America's Cold War coalition will have to be rebuilt. And that's okay. What's not okay is to believe that reason, plus maybe a few trade deals, will bring Putin around.

Sunday, March 16, 2014

Not long ago, America was having a lot of bad hair days in foreign affairs. The war in Iraq ended without stirring speeches or victory parades. The war in Afghanistan is winding down, but won't have a prettier conclusion. America led from behind in Libya and messed up in Benghazi. Then, America led from even farther behind in Syria and, not surprisingly, got an aviary flip from the Assad regime when President Obama objected to the use of poisonous gas. To avoid being totally blown off by a two-bit tin pot dictator, the Obama Administration had to work with Vladimir Putin's autocracy for a face-saving compromise that still isn't near full implementation. America's grand strategy of pivoting toward Asia has floundered as extremism of numerous varieties keeps provoking eruptions in the Middle East and Europe.

Now comes Vladimir Putin--let's call him Vlad the Invader--who puts the shine on the United States. Using the most transparently farcical of pretexts, Putin seized Crimea from Ukraine. Okay, so there was a referendum in Crimea as to whether or not to "validate" the Russian land grab. But with thousands of Russian troops "guarding" the polls to ensure "integrity" to the voting process, we knew how the vote would turn out before the polls opened. There is nothing America can do to prevent Russia's annexation of Crimea, just as there was nothing America could do to stop Putin's 2008 land kleptomania in Georgia.

But America can and will react. The EU will talk a lot--and then talk some more. It will issue a few condemnations and maybe even an excoriation. But sanctions? Well, let's talk some more.

America's sanctions will be primarily economic. And Russia will respond in kind. America's economic interests will suffer. But Russia's economic interests will suffer more. Not necessarily in terms measured by dollars (or rubles), but in terms of relative pain. Russia has a much smaller and weaker economy than America. And Russia's economy is growing slower, with continued prospects for slow growth. Crimea requires significant subsidies, which will further drain Russia's resources, along with the added cost of all the military "exercises" the Russian Army is staging with walking distance of the Ukrainian border. From a strategic standpoint, Russia's nuclear arsenal is a match for America's. But Russia's economic arsenal is far weaker. And Russia's energy customers and trade partners will look elsewhere for supplies and opportunities, not wanting to give leverage to a bully with a powerful military.

The Cold War was primarily an economic struggle. America and the Soviet Union engaged in a 50-year competition to build to the most advanced and powerful military. Arsenals cost money, and America's vastly greater wealth left the Soviet Union moribund, unable to deliver prosperity or even anything approaching a First World standard of living for its citizens.

As America and Russia swap sanctions, it is important to keep in mind that, realistically, the goal isn't to force Russia out of Crimea. That won't happen. The goal is to turn the crisis into an opportunity to make America once again the world's shining beacon of freedom and democracy. America's sanctions, although likely to be ineffectual in terms of sending Russian troops back to the barracks, will contrast sharply with the EU's decrepitude, and the near silence from the Asia. As an ironic consequence, America's influence around the world, and especially in the periphery of Russia's borders with many former members of the Soviet Union and former Soviet satellite states, will likely grow. After all, no one likes a bully. The bottom line is Putin has made America stronger.

The outcome of the looming war of sanctions is difficult to predict with precision. But the advantage lies with America and its great economic strength. Germany and Japan won the early rounds of World War II. The Soviet Union won most of the early rounds of the Cold War. But we know how those stories ended. Even if Putin will be able to feel like a studly fellow for a while, time isn't on his side. Keep the faith.

Monday, March 3, 2014

Okay, so Mt. Gox, once the largest Bitcoin exchange, has belly flopped and lots of people have lost lots of Bitcoins (apparently hundreds of millions of dollars worth). Mt. Gox is in bankruptcy, but unsecured creditors like its erstwhile customers usually get the back of a hand in bankruptcy proceedings. Last year, Bitcoin was celebrated for its independence from any national authority and the anonymity it supposedly provides. This year, the losses from Mt. Gox have many crying for regulation. Is that a good idea?

First, Bitcoin would have to change fundamentally for regulation to work. Anonymity would have to go. Regulators need to safeguard the market from thieves, manipulators, and all variety of fraudsters and other crooks. That necessarily means they need to know who is behind transactions--potentially any transaction. It is axiomatic among financial regulators that, in order to uncover shenanigans in the market, one follows the money. And you have to be able to find out who is behind transactions in order to follow the money. So, if you really want regulation, say goodbye to the anonymity of Bitcoin.

But an even more important question for the nation(s) that might consider regulating Bitcoin is why would regulation serve the public interest? Bitcoin is economically trivial. If all Bitcoins disappeared tomorrow, the world economy and all major national economies wouldn't even hiccup. Setting up an effective regulatory regime would require not just one nation, but the participation of all economically significant nations because Bitcoin can be bought or sold worldwide. The costs of establishing regulatory agencies, hiring personnel, buying equipment, leasing office space, and funding investigative and regulatory processes would, by all appearances, greatly outweigh the societal benefit.

Another risk of regulating Bitcoin is that doing so would legitimize it. Once a government begins to regulate a financial contract, it makes that contract more attractive to mainstream financial markets players. That would mean the major banks, hedge funds and other big players would start trading all manner of Bitcoin contracts. A derivatives market in Bitcoins would pop up, and with it all kinds of headaches about risk management, settlement and clearance, and so on. All for something the world doesn't need.

And sooner or later, some form of governmentally sponsored deposit insurance would probably be sought by Bitcoin enthusiasts. If the big banks and hedge funds add their lobbying power, such insurance might make it through Congress. But deposit insurance could easily, directly or indirectly, end up putting taxpayers on the line to cover Bitcoin losses like those suffered by Mt. Gox customers. Which would be just peachy--another taxpayer funded bailout in the making.

The bottom line: don't regulate Bitcoin. There's nothing in it for national governments or taxpayers. We don't need more financial risk for regulators, central banks and taxpayers to worry about. If Bitcoin is truly worth anything, it will survive in the market. And if it doesn't, good riddance.

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